| Last week we discussed the idea that earnings expectations for S&P 500 companies need to come down. Recession or no recession, our view continues to be that current earnings expectations are too high for economic growth prospects over the next 12 months. Last week, earnings expectations for 2023 moved noticeably lower. Based on projected 2023 earnings earlier in June ($252.03), the forward price-to-earnings (P/E) ratio of the S&P 500 would currently be 16.4x. Given the reduction in 2023 expectations to $245.74, the actual forward price-to-earnings ratio is creeping closer to 17x. Based on Strategas Research Partners’ view (SRP Estimate of $233.75), the ratio will move closer to 18x. For context, the long term historical average P/E for the S&P 500 is about 14x. Over the last 20 years, the average has been about 15x. The bottom line is that the stock market can become more expensive simply by earnings expectations falling – the E in the P/E ratio falling. This is precisely what we are seeing today, and our view is that we continue to see expected earnings for 2023 come down. Valuations are not a good timing tool in terms of short-term market direction; however, we think there is a limit to how much investors will be willing to pay for every dollar of corporate earnings as the Fed continues to tighten and slower economic growth persists. |
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